Private Information, Human Capital, and Optimal "Home Bias" in Financial Markets

64 Pages Posted: 25 Jan 2010 Last revised: 6 Feb 2010

See all articles by Isaac Ehrlich

Isaac Ehrlich

State University of New York at Buffalo - Department of Economics; National Bureau of Economic Research (NBER); University of Chicago - University of Chicago Press; Institute for the Study of Labor (IZA)

Jong Kook Shin

Korea University - Sejong Campus

Yong Yin

State University of New York (SUNY), Buffalo - College of Arts & Sciences - Department of Economics

Multiple version iconThere are 4 versions of this paper

Date Written: January 2010

Abstract

By allowing for imperfectly informed markets and the role of private information, we offer new insights about observed deviations of portfolio concentrations in domestic relative to foreign risky assets, or "home bias", from what standard finance models predict. Our model ascribes the "bias" to endogenous information acquisition bolstered by investors' human capital. We develop discriminating hypotheses about the influence of "specific" and "general" human capital endowments and direct and opportunity costs of managing risky assets in determining whether to hold these assets, and how the assets' portfolio shares vary across investors and financial markets. These hypotheses are supported by numerical and econometric analyses of panel data from the US over 1992-2007, and 23 international financial markets over 2001-2007. The results indicate the existence of differences across countries in the degree to which home asset prices are "information-revealing", which may be relevant for fully understanding the global financial crisis of 2007-09.

Suggested Citation

Ehrlich, Isaac and Shin, Jong Kook and Yin, Yong, Private Information, Human Capital, and Optimal "Home Bias" in Financial Markets (January 2010). NBER Working Paper No. w15668, Available at SSRN: https://ssrn.com/abstract=1540953

Isaac Ehrlich (Contact Author)

State University of New York at Buffalo - Department of Economics ( email )

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Jong Kook Shin

Korea University - Sejong Campus ( email )

Sejong
Korea, Republic of (South Korea)

Yong Yin

State University of New York (SUNY), Buffalo - College of Arts & Sciences - Department of Economics ( email )

Buffalo, NY 14260
United States

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